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Status quo likely in upcoming MPC meeting, say brokerage houses

  • AHL and Topline believe key policy rate expected to remain at 22%
Published July 20, 2023

Two brokerage houses formed a consensus on the upcoming Monetary Policy Committee (MPC) meeting to be held on July 31, saying they believe the State Bank of Pakistan (SBP) is unlikely to revise the key policy rate.

“We expect the SBP to hold the policy rate at 22% in this meeting,” said Arif Habib Limited (AHL) in a report on Wednesday.

Monetary Policy Committee: SBP issues advance calendar for meetings in July-December

The central bank in its MPC meeting on June 12, 2023 maintained the policy rate unchanged at 21%. However, two weeks later, the SBP convened an emergent meeting on June 26, 2023 in which it decided to increase the policy rate by 100bps to 22%.

The MPC back then said that the action was “necessary to keep real interest rate firmly in the positive territory on a forward-looking basis.”

It was of the view that the hike would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium-term target of 5 –7% by the end of FY25.

AHL said the upcoming MPC, which comes after the International Monetary Fund (IMF) Stand-By Agreement (SBA), will remain in focus.

Notion of further interest rate hikes would only heighten risks to overall growth and exacerbate prevailing economic challenges: AHL

In its country report, the IMF staff emphasised that the SBP will need to continue its tightening cycle to re-anchor expectations given that inflationary pressures are expected to persist over the coming year, including because the impact of exchange rate corrections will continue to reverberate through the economy.

Meanwhile, AHL shared that as per its working the FY24’s headline inflation is likely to clock in at around 20.8%, lower than IMF’s estimates of 25.9%.

“With these projections, notably, real interest rates have already turned positive on a forward-looking basis. However, considering the higher inflation forecasts presented by the IMF, some market participants now anticipate the possibility of further interest rate increase in the upcoming monetary policy meeting scheduled for July 31, 2023,” it added.

“The base effect has already come into play from June 2023 onwards, contributing to the moderation of headline inflation which came down to 29.4% after peaking at 38% in the prior month (May),” said AHL.

The brokerage house projects average monthly inflation to be 1.07% until June 2024, taking the YoY average slightly above 20% for headline inflation during FY24 as lower demand-side pressures, moderating global commodity prices, and a high base effect will all contribute to bringing down inflation.

Topline Securities, another brokerage house, also expected no change in the upcoming MPC meeting.

“However, even if there were a 100bps change, it would not have a major impact due to the high base,” it said.

As per the Topline survey, 48% of participants expected no change in policy rate while 46% of participants expected a 100bps increase in policy rate. The remaining 6% expected the policy rate to increase by more than 100bps.

“We anticipate monthly CPI inflation to soften further in upcoming months and gradually decline over the next 12 months because of base effect along with tight monetary and fiscal policy” said Topline. “Decline in petrol and diesel prices will also ease inflation in coming months, unless there is major pressure on the rupee and global oil prices.”

AHL also said that the economy is currently displaying indications of weakened aggregate demand.

“The existing high interest rate, in conjunction with other macroeconomic measures, has already impeded economic growth, as evidenced by the recently released provisional GDP growth figure of 0.29% for FY23.

“This is more notable in the LSM sector which has experienced a significant YoY decline of 9.9% during the 11MFY23. This decline can predominantly be attributed to the ramifications of stringent macroeconomic policies and the escalating cost of conducting business, exerting substantial downward pressure on aggregate demand.

“Consequently, the notion of further interest rate hikes would only heighten risks to overall growth and exacerbate prevailing economic challenges.”

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